Perhaps the most interesting and influential financial journalist of the 1970s was a guy by the name of Jude Wanniski, who was an editorial writer for Wall Street Journal, from 1972 to 1978. In the wake of the Watergate scandal, and the devastating losses suffered by the Republicans in the 1974 Congressional elections, many people thought that the Republican party might not survive. The GOP certainly did not seem to offer much hope for free-market conservatives and libertarians, Richard Nixon having imposed wage-and-price controls in 1971, with the help of John Connally and Arthur Burns and enthusiastic backing from almost all Republicans. After Nixon resigned, leadership of the party was transferred to his successor, Gerald Ford, a very nice and decent fellow, whose lack of ideological conviction was symbolized by his choice of Nelson Rockefeller, an interventionist, big-government Republican if there ever was one, to serve as his Vice-President.

In this very dispirited environment for conservatives, Jude Wanniski’s editorial pieces in the Wall Street Journal and his remarkable 1978 book The Way the World Works, in which he advocated cuts in income tax rates as a cure for economic stagnation, proved to be an elixir of life for demoralized Republicans and conservatives. Wanniski was especially hard on old-fashioned Republicans and conservatives for whom balancing the federal budget had become the be all and end of all of economic policy, a doctrine that the Wall Street Journal itself had once espoused. A gifted phrase maker, Wanniski dubbed traditional Republican balanced-budget policy, root-canal economics. Instead, Wanniski adopted the across-the-board income tax cuts proposed by John Kennedy in 1963, a proposal that conservative icon Barry Goldwater had steadfastly opposed, as his model for economic policy.

Wanniski quickly won over a rising star in the Republican party, former NFL quarterback Jack Kemp, to his way of thinking. Another acolyte was an ambitious young Georgian by the name of Newt Gingrich. In 1978, Kemp and Senator Bill Roth form Delaware (after whom the Roth IRA is named), co-authored a bill, without support from the Republican Congressional leadership, to cut income taxes across the board by 25%. Many Republicans running for Congress and the Senate in 1978 pledged to support what became known as the Kemp-Roth bill. An unexpectedly strong showing by Republicans supporting the Kemp-Roth bill in the 1978 elections encouraged Jack Kemp to consider running for President in 1980 on a platform of across-the-board tax cuts. However, when Ronald Reagan, nearly 70 years old, and widely thought, after unsuccessfully challenging Gerald Ford for the GOP nomination in 1976, to be past his prime, signed on as a supporter of the Kemp-Roth bill, Kemp bowed out of contention, endorsing Reagan for the nomination, and uniting conservatives behind the Gipper.

After his landslide victory in the 1980 election, Reagan, riding a crest of popularity, enhanced by an unsuccessful assassination attempt in the first few months of his term, was able to push the Kemp-Roth bill through Congress, despite warnings from the Democrats that steep tax cuts would cause large budget deficits. To such warnings, Jack Kemp famously responded that Republicans no longer worshiped at the altar of a balanced budget. No one cheered louder for that heretical statement by Kemp than, you guessed it, the Wall Street Journal editorial page.

Fast forward to 2012, the Wall Street Journal, which never fails to invoke the memory of Ronald Reagan whenever an opportunity arises, nevertheless seems to have rediscovered the charms of root-canal economics. How else can one explain this piece of sophistry from Robert L. Pollock, a member of the group of sages otherwise known as the Editorial Board of the Wall Street Journal? Consider what Mr. Pollock had to say in an opinion piece on the Journal‘s website.

[T]o the extent that the United States finds itself in a precarious fiscal situation, Federal Reserve Chairman Ben Bernanke shares much of the blame. Simply put, there is no way that Washington could have run the deficits it has in recent years without the active assistance of a near-zero interest rate policy. . . .

European governments finally decided to take cost-cutting steps when their borrowing costs went up. But Democrats and liberal economists use Mr. Bernanke’s low rates and willingness to buy government bonds as evidence that there’s no pressing problem here to be addressed.

This is a strange argument for high interest rates, especially coming from a self-avowed conservative. Conservatives got all bent out of shape when Obama’s Energy Secretary, Stephen Chu, opined that rising gasoline prices might actually serve a useful function by inducing consumers and businesses to be more economical in their their use of gasoline. That comment was seized on by Republicans as proof that the Obama administration was seeking to increase gasoline prices as a way of reducing gasoline consumption. Now, Mr. Pollock provides us with a new argument for high interest rates: by raising the cost of borrowing, high interest rates will force the government to be more economical in its spending decisions. Evidently, it’s wrong to suggest that an increased price will reduce gasoline consumption, but it’s fine to say that an increased interest rate will cut government spending. Go figure.

It isn’t that Republicans don’t enjoy cutting taxes. They love it. But there is something in the Republican chemistry that causes the GOP to become hypnotized by the prospect of an imbalanced budget. Static analysis tells them taxes can’t be cut or inflation will result. They either argue for a tax hike to dampen inflation when the economy is in a boom or demand spending cuts to balance the budget when the economy is in recession.

Either way, of course, they embrace the role of Scrooge, playing into the hands of the Democrats, who know the first rule of successful politics is Never Shoot Santa Claus. The political tension in the market place of ideas must be between tax reduction and spending increases, and as long as Republicans have insisted on balanced budgets, their influence as a party has shriveled, and budgets have been imbalanced.

How’s that old root-canal economics working out for ya?

Now back to Pollock. Here’s how he explains why low interest rates may not really be helping the economy.

It would be one thing if there were widespread agreement that low rates are the right medicine for the economy. But easy money on the Bernanke scale is a heretofore untested policy, one for which the past few years of meager growth haven’t provided convincing evidence.

Fair enough. Low rates haven’t been helping the economy all that much. But the question arises: why are rates so low? Is it really all the Fed’s doing, or could it possibly have something to do with pessimism on the part of businesses and consumers about whether they will be able to sell their products or their services in the future? If it is the latter, then low interest rates may not be a symptom of easy money, but of tight money.

Pollock, of course, has a different explanation for why low interest rates are not promoting a recovery.

Economists such as David Malpass argue that low rates are actually contractionary because they cause capital to be diverted from more productive uses to less productive ones.

Oh my. What can one say about an argument like that? I have encountered Mr. Malpass before and was less than impressed by his powers of economic reasoning; I remain unimpressed. How can a low interest rate divert capital from more productive uses to less productive ones unless capital rationing is taking place? If some potential borrowers were unable to secure funding for their productive projects while other borrowers with less productive projects were able to get funding for theirs, the disappointed borrowers could have offered to borrow at increased interest rates, thereby outbidding borrowers with unproductive projects, and driving up interest rates in the process. That is just elementary. That interest rates are now at such low levels is more reflective of the pessimism of most potential borrowers about the projects for which they seeking funding, than of the supposed power of the Fed to determine interest rates.

So there you have it. The Wall Street Journal editorial page, transformed in the 1970s by the daring and unorthodox ideas of a single, charismatic economic journalist, Jude Wanniski, has now, almost four decades later, finally come back to its roots. Welcome home where you belong.

“How can a low interest rate divert capital from more productive uses to less productive ones unless capital rationing is taking place? If some potential borrowers were unable to secure funding for their productive projects while other borrowers with less productive projects were able to get funding for theirs, the disappointed borrowers could have offered to borrow at increased interest rates, thereby outbidding borrowers with unproductive projects, and driving up interest rates in the process. That is just elementary.”

Not as elementary as you think. Productive projects funded with debt can be self defeating – nominal cost of servicing the debt stays the same while real cost rises.

Non-productive projects funded with debt can be self rewarding – nominal cost of servicing the debt stays the same while real cost falls.

Also, interest rates are structured to reward lack of credit risk, not productivity. And so a monopoly enterprise will always have the advantage versus an enterprise that is subject to competition.

The WSJ seems to be in favor of whatever will make life awful for President Obama. Logic does not have anything to do with it.

I am sorry Romney lost for one reason; I wondered if Romney would appoint John Taylor as his Fed Chief, and Taylor would espouse NGDP targeting, perhaps with new GOP language attached to it.

Taylor’s five-page economic growth release (written for Romney) barely mentioned monetary policy, and Taylor has said nice things about the many market monetarism books on the market, and course, Taylor gushed about QE in Japan.

My guess is that Romney would have sbare-rattled for war in Iran, pumped up military outlays, and Taylor would have printed money to the moon.

hehehe…This post inspires a bit of verse. As to Chu’s remark about gas prices and the consequent reaction – “More wealth for me, but not for thee!” And for all the businessmen convinced that low interest rates are contractionary, perhaps they could use a vacation to Greece about now, where they would find to their dismay that “Businessmen go where the money flow”.

Marcus, I never met him or corresponded with him, but I was friendly with Alan Reynolds who worked with him for a number of years at Polyconomics. Even though Laffer got credit for the Laffer curve, Wanniski was way more influential.

Bill, I am neither a supply-sider nor a root canal guy. My aim was simply to call attention to the frailty of the Wall Street Journal editorial page. But on a purely pragmatic level, I don’t think root canal is a winning political strategy.

Frank, I don’t understand you. Care to provide an example of what you mean? I also don’t know what you mean by interest rates being “structured.” Do you mean that there are varying risk premia on loans to reflect the risk of default by the borrower? That’s the supply of credit. Low productivity projects would tend to be associated with higher risk premia, so that would tend to screen out low productivity borrowers, not high-productivity borrowers.

Mike, Thanks. As I said, I admired Wanniski and learned a lot from him, but I didn’t agree with him about a lot of things. He was way too carried away with his way of looking at the world. Were you at Polyconomics when Alan Reynolds was there?

Benjamin, You’re absolutely right about the WSJ. Their standards are just terrible.

“Not as elementary as you think. Productive projects funded with debt can be self defeating – nominal cost of servicing the debt stays the same while real cost rises.”

“Frank, I don’t understand you. Care to provide an example of what you mean?”

Production in excess of demand tends to push the prices of the goods produced down. If that production was funded with borrowed money then the nominal cost of the borrowed money stays the same but the real cost rises.

“Non-productive projects funded with debt can be self rewarding – nominal cost of servicing the debt stays the same while real cost falls.”

See housing bubble.

I also don’t know what you mean by interest rates being “structured.” Do you mean that there are varying risk premia on loans to reflect the risk of default by the borrower?

I agree with Benjamin Cole on this one. The WSJ is clearly just interested in giving Obama and Dems a “bloody nose.” There is no deeper cause for a “rethink”, although methinks you fully understand this.

Frankly, it seems to me that a few economists in the last year, in support of the Romney campaign have espoused very poor ideas. It’s like they think there is no objective reality, only political reality, so they have to oppose whatever Obama supports in order that they can say he’s wrong. Obviously he is wrong, but generally for the exact opposite reasons that they cite: the US needed either stronger monetary or fiscal stimulus. Hopefully, we are now getting the medicine we need.

Benjamin, We agree that the WSJ is generally not to be taken seriously on the merits. However, unfortunately it is far from irrelevant as an opinion leader. I think, based on zero evidence, I admit, that a lot of people look to the Journal to learn what they should be thinking. Thanks for the kudos. Never thought of myself as a revolutionary. I too will miss newspapers. Sic transit gloria mundi.

Frank, I had in mind ex ante productivity of an individual project for which an entrepreneur is seeking financing, you are referring to the ex post consequence of aggregate productivity being greater or less than expected. Once again we are talking past each other.

Julian, Yes, my point was how utterly result driven, the WSJ editorial page has become. If it will advance whatever cause they are pushing at the moment, no argument is beneath them. That is part of the corruption of political discourse we are witnessing at the moment. Both sides are guilty, but the collapse of standards on one side is simply stunning.

About Me

David Glasner
Washington, DC

I am an economist at the Federal Trade Commission. Nothing that you read on this blog necessarily reflects the views of the FTC or the individual commissioners. Although I work at the FTC as an antitrust economist, most of my research and writing has been on monetary economics and policy and the history of monetary theory. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey's unduly neglected contributions to the attention of a wider audience.